(This is being written on the evening of Fri April 26 Japan time for context/reference - just in case JPY volatility has already exploded by the time you read this)
▷ MOF’s biggest fear and risk is a failed yentervention, as JPY would be truly destroyed, and this is what is keeping yentervention from taking place
▷ Why is BOJ/Ueda being so casually flippant about JPY? Because they have MOF’s assurance
▷ BOJ must mind sharply rising JGB yields, and MOF must mind sharply rising USDJPY
▷ On JPY Futures and Options, and fake yenterventions
▷ What Could Happen if Yentervention Fails
I believe there is risk of an imminent Ministry of Finance yentervention in the spot market - as in potentially over the next week (where Japan is off for Golden Week), if not at some point during the US trading session today, depending on how JPY trades.
I still maintain my theoretical USDJPY 158 target for yentervention, but that was what I had theorized on April 15th, and obviously that has to flexibly adapt to prevailing market conditions (though, with USDJPY currently knocking on 157’s door, my price target and time frame of “158 on BOJ day” from my April 16th note Yentervention #3 - excerpt below)
…it seems at this rate, USDJPY 158 will be reached not only within this month, but seems to land right on April BOJ day. And so that also sets up against precedence of yentervening on BOJ day post press conference.
Here is what I forgot to add to my note from yesterday about a potential BOJ shock rate hike possible, due to BOJ taking on a “currency mandate” - and why Ministry of Finance (who is the body that is “supposed to” yentervene) is frozen.
The absolute worst thing that can happen to JPY is if there is an official, state-executed Ministry of Finance yentervention - and it fails.
By “fails” - I mean tens to hundreds of billions of USD sold in the spot market, and USDJPY plummets, but then subsequently recovers in short order (within minutes ~ a couple of days).
If that should happen, then it would reveal to everyone that the single most direct tool available to combat JPY downside - the act of stepping into markets and directly buying JPY / selling USD - is not effective.
And if that realization sweeps across markets, JPY will be destroyed, and instantly so. (More on this in section below.)
I am of the belief that the Ministry of Finance is terrified of a failed yentervention - and that the MOF views the risk of a failed yentervention to be greater than a slow-death JPY occurring as we speak. And as long as that weighting of risk exists AS MINISTRY OF FINANCE PERCEIVES IT (and not what I / we believe will/won’t happen in markets) - yentervention will continue to not be used, and only verbal jawboning, and symbolic (until not) measures such as the US-Japan-South Korea trilateral joint statement from G20 Washington last week will be used (and used to its full extent).
This is why I had been thinking that BOJ might sneak a shock rate hike at today’s policy meeting. They not only did not do any such thing - they stayed completely unchanged from March. Quite literally - the official monetary policy statement is an extremely short, empty “ditto, March”
Its not just BOJ, its Governor Ueda’s behavior and conduct at the press conference- who is taking a very strange apathetic attitude about a +5% multi-decade breakout in USDJPY since the last BOJ meeting only a month earlier, despite the common narrative that the March BOJ itself had kicked off the relentless JPY decline - (inaccurate as that may be).
“Recent depreciation in the yen has not had significant impact”
-Governor Ueda Press Conference
That quote is everywhere right now in Japan. And it’s not a one-off comment- basically every question throughout the entire press conference was yen, yen, yen. Governor Ueda had maintained this “not a big deal/factor” stance. This is why USDJPY at the start of the press conference was at 155.90, and hit 156.72 during.
Why is BOJ / Ueda being so nonchalant about the yen?
They didn't shock hike rates as I had suggested, that’s fine/normal to not do that. But not hint hawkish if policy is unchanged? Why go out of your way to be “toned down?”
Could be any number of reasons, including (but not limited to):
Bank of Japan / central banks do not oversee currency- currency is under the Ministry of Finance
Gov Ueda does not want to be seen as minding the currency, more so than minding the currency, such that he’ll go out of his way to show it
Gov Ueda genuinely does believe (and may even be correct about) recent JPY weakness is of little significance at this moment
OR...
Governor Ueda has private reassurance / communication by Finance Minister Suzuki that Ministry of Finance has its finger on the trigger of an imminent yentervention (should JPY continue to decline, as it did / is still doing).
In my note yesterday, I said the following regarding why a shock rate hike is far more probable than being considered by consensus for today, and the BOJ’s new “currency mandate”
I don’t see why you wouldn’t take this shot. And if Japan really can't handle a front end policy rate of 0.2% (vs 5 handle Fed funds), then you probably shouldn’t have even poked your head out of negative-rate-land in the first place.
So, that is the basis of my rationale for why there could be a surprise move in BOJ policy rates- and if not in April, then really for any meeting going forward. As long as JPY continues to sink ever lower, BOJ will likely assume the role of currency combatant.
But today, JGB yields rose, and sharply. In fact, JGB yields have been rising sharply in the past few days, but especially today, despite no policy change.
10Y JGB yield is now clear in the 90bp handle - single digit basis points away from the 1% previous YCC upper band of tolerance.
2Y JGB yields are clear through the 30bps level:
But perhaps most significant are 5Y JGB yields, which had the sharpest rate of change among JGB tenors, and blasted through 50bps today:
So, Ministry of Finance, who has to issue JGBs at ever higher yields for the world’s most indebted country, also does not want a spike in JGB yields any more than they want to see JPY get crushed - perhaps even more so for supporting JGB market than supporting JPY, if they had to choose one over the other.
But, as widow maker traders know (or maybe they don’t) - Japan has the unique ability to defy economic gravity in the “near term." Meaning, Japan can support both the JGB market and JPY simultaneously - as they’ve shown they can over the past 2 years. And both JPY AND JGBs need support right now.
And who is the only one who can publicly / via policy prevent a run on JGBs? Bank of Japan, as direct buyers of JGBs, and Governor Ueda - who did not express hawkishness on JGB buying (just a very general “will decrease the amount of JGB purchases over time”).
Who is the only one who can publicly / “via policy” prevent a run on JPY? Ministry of Finance, as direct buyers of JPY / sellers of USD via yentervention.
So, why was BOJ/Ueda so dismissive of JPY -5% since last month’s meeting, and hitting new 3 decade lows from time of policy release until time of press conference?
Because MOF Suzuki told him not to be hawkish, for the sake of JGB market, and to “rest assured” because MOF will re-take the Japan currency management baton back from BOJ with a yentervention locked and loaded.
That is my genuine view, and that’s why I am flagging this as an imminent possibility. And again, “imminent” can mean over the next few days (despite Japan’s week long holiday), and it can also very much mean today’s US trading session.
On JPY Futures Markets
Again, I remind you that this is a VERY systematically driven algorithm market, combined with an extremely jittery market for JPY. Which means that nobody in the fund management industry (who wants to keep their job beyond this week) is actually opening new short positions in JPY NOW. Systematics and CTAs are.
I warned of precedence existing for an after-BOJ Governor press conference yentervention. Perhaps those algos got my note.
Im kidding obviously about algos positioning based on my note. What I am not kidding about is - this sharp flash crash following Ueda’s press conference earlier today - this occurred at 🇯🇵5pm on the dot, and for no fundamental reason. This was a pre-programmed order to buy/short squeeze JPY futures. And after that fizzled, you have a wave of systematic flows in futures markets pushing the opposite way downward again - all within seconds to minutes.
Here are the notional volumes that traded at that 5pm USDJPY flash crash (JPY futures flash rally and crash):
From 17:00-17:01: $1.25bn of JPY Futures BUYING
17:03-17:07: $1.55bn of JPY Futures SELLING
These are not people, these are machines. And I have zero doubt that they are using a very jittery market, as well as the precedence I cited, to try and pull actual people into markets and coast off of their flows.
Do not fall for fake yenterventions. At this point, there are far more fake yentervention than real (there have been 2 real ones). You/we will know when it is real (even if that real yentervention subsequently fails shortly thereafter). And in case we dont know when it’s real, we at least do know when it's fake. Flash crashes that revert back within seconds are not yenterventions.
On JPY Futures Options
As of yesterday’s CME close, there are:
58,577 open interest in JPY PUTS, of which 18,185 are OUT OF THE MONEY PUTS
109,778 open interest in JPY CALLS, of which 104,996 are OUT OF THE MONEY CALLS.
So, there are likely a ton of existing JPY futures shorts are hedged with calls, and/or, there are a TON of JPY Calls that are playing the JPY upside as the primary position, and hedging with JPY futures shorts.
What Could Happen if Yentervention Fails
If that should happen, then it would reveal to everyone (households, corporations, and market participants foreign and domestic, as well as Japan policy makers themselves) that the single most direct tool available to combat JPY downside - the act of stepping into markets and directly buying JPY / selling USD - is not effective.
And if that realization sweeps across markets, JPY will be destroyed, and instantly so in classic fashion as we have seen in many modern examples - as per UK/Bank of England, Asia currency crisis, Turk lira, Argentina Peso and so on.
Markets are just too fast for any sort of policy combat, an unavoidable reality. So even an emergency “Plaza Accord II” type of multilateral reset, which will absolutely be necessary, will be too late by definition because such reorganizations of global order only occur in response to disaster, after the fact.
In other words, a failed yentervention realized by markets means no more current luxury of a “JPY Slow Death” as I have been phrasing and conceptualizing it.
And that is what I believe the Japan Ministry of Finance is currently terrified of, and has been restraining them from yentervening until they feel they have no choice. Right now, markets at least fear a yentervention- and the existence and maintenance of that fear is everything. It’s what is keeping Bank of Japan alive - this notion / very much real nickname “widowmaker.” But that fear can also vanish in an instant on a sentiment or perception flip.
Note that a JPY implosion driven by both capital flight, as well as speculative actors and hedge funds will not play out like Soros vs Bank of England - which of course had macro market spillovers, but in hindsight is broadly remembered as a UK-GBP disaster “only.” IF JPY were to face a similar enemy (the hedge fund pile-on), it would create far more widespread market and socioeconomic calamity.
When the hedge fund pile-on happens to a country or state and authorities go to battle against these market forces, they just calculate approximately how much ammo the attacked target has, and then break the bank. In the case of a sovereign, say an emerging market with a USD peg, they know approximately how much in FX reserves that country has (its ammo stockpile), and go to battle until it runs out of ammo, then goes in for the kill and crushes the currency, or the sovereign bonds, or both.
What makes Japan uniquely disastrous a target for the hedge fund pile-on is that Japan has the largest Net International Investment Position (NIIP) in the world (owns more foreign assets vs foreigners owning Japan assets than anyone else), of which Japan is the largest foreign creditor to the US (largest foreign owner of US Treasuries). Most of this world’s largest NIIP and UST ownership is due to the private sector, but Japan, the sovereign, including the Bank of Japan, does own a significant proportion of USTs and other government debt as well.
And rightly or not, it will be assumed that enormous amounts of US Treasuries will be fire-sold by the state in order to fight to support JPY. And “US Treasuries” and the term “fire-sale” in the same sentence is never ever a good thing for markets. And that is what makes a run on JPY especially dangerous. Now, as I mentioned already, that is what will also make the international effort to save JPY come to fruition - but as I also mentioned, there will be massive damage done before any coordinated mitigation efforts can step in.
My Substack Note posted pre-Ueda press conference (which, I know many of you probably don’t get notified of, and I still don’t know how these “Notes” work) - here is the body of it from earlier:
Extremely empty policy statement (attached) - to put in context, even when it’s a policy unchanged meeting, they still just cut and paste from the previous meeting statement (over and over again). Why they didn’t do that this time - I don’t know, and I’m trying to figure out if it means anything. Mind you, for such an empty policy statement, the release time was just before 🇯🇵12:30PM market open, which trails the usual release time by a good 30-45 mins.
Meaning- this wasn’t a “we all good with unchanged? Cool. What’s for lunch?” type of unchanged- there must have been some debate going on.
And again- this is a meeting with no press leak (for once) - so there is no watching markets / deciding in real time going on to explain the delay (as per in April ‘23 BOJ with 1PM on the dot release after Nikkei preannounced at 10am that very morning: policy unchanged + launch of comprehensive 25 year policy review watching, & BOJ board watches markets into 🇯🇵AM session close + first 30 mins of PM open)
Gov Ueda press conf in a few minutes - this time, given the lack of both media leaking policy + empty policy statement itself + long meeting, Ueda press conf will be a different type of important - we (markets) need info/guidance, sir.
Oh, right, and also important because JPY is getting slammed.
Reminder of the precedence from Sept ‘22 yentervention, in which (then) BOJ policy unchanged had also continued to cripple JPY, and 15 minutes after BOJ press conf end- MOF slams USD ↓
USDJPY 158 is my yentervention potential level
BUT, if USDJPY keeps the 12:30pm post-BOJ statement release momentum going and USDJPY hits say 157 during Ueda, be on high alert for (actual) MOF yentervention in spot market imminent - though they may wait until 🇺🇸PCE later
And note that as of now, this is Japan closed for entire next week Golden Week
(posted shortly before 🇯🇵3:30PM, heading into Ueda press conference)
Will update again if/when whatever crazy happening happens
Great post Weston. Skimmed it quickly, still relishing Yen Crushed Control, chuckling at the title. Dollar yen perilously close to 158. I did not see your note but will look there whenever I have Asia on my mind. Thx for great work
Watching yentervention now as it is happening.
You nailed it. You said this week because its a holiday ✅
Yr range was USD/JPY 158-165. They started from 160 ✅ - Its at 155 now and still moving.
Well done!
Great post Weston. Skimmed it quickly, still relishing Yen Crushed Control, chuckling at the title. Dollar yen perilously close to 158. I did not see your note but will look there whenever I have Asia on my mind. Thx for great work